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U.S. Assists Finland in Investigation of Payment Cardholders for Unreported Income via John Doe Summons - Will the Use of LLCs and Trusts Conceal Their Identities?

The United States petitioned the court to authorize the summonses at the request of the government of Finland under the income tax treaty between Finland and the United States.

On May 1, 2019, the United States Department of Justice announced that a U.S. federal court had authorized the Internal Revenue Service (IRS) to serve a so-called “John Doe” summons[1] to several U.S. financial institutions. The summonses seek information about persons residing in Finland who have payment cards linked to bank accounts located outside of Finland. As stated in a Department of Justice press release: “The Department of Justice and the IRS are committed to working with the United States’ international treaty partners to identify and stop individuals using hidden offshore accounts to evade tax laws… The United States does not tolerate offshore tax evasion, nor does it sanction tax evasion committed through U.S. financial institutions.”

The Proceeding Is Pursuant to the U.S.-Finland Tax Treaty

The United States petitioned the court to authorize the summonses at the request of the government of Finland under the income tax treaty between Finland and the United States. That treaty permits the exchange of information that is necessary for carrying out each country’s tax laws. The summonses seek the identities of Finnish residents who have payment cards linked to bank accounts located outside of Finland so that the Finnish government can determine if those persons have complied with Finnish tax laws.

The Cardholders’ Identities Are Not Known to Finnish Tax Authorities

Finland has advised the IRS that when a card connected to a foreign financial institution is used only in ATM machines in Finland, or when the authorization of the payment is done by PIN code without identification of the cardholder, the cardholder(s) cannot be identified from information sources in Finland. As described in the documents filed by the United States, Finland’s request for assistance is part of a foreign payment project being conducted by the Finnish Tax Administration (FTA), in which information on the use of payment cards issued by foreign financial institutions is used to identify noncompliant Finnish taxpayers. Earlier FTA investigations have revealed extremely high rates of tax noncompliance. The issuing banks are the only sources for the information sought by the proposed summonses that is available to the FTA or the IRS, other than the unidentified taxpayers themselves.

What Information Will Be Produced to the FTA?

It is likely that the summonses will seek the following information for the period of January 1, 2013, through December 31, 2017:

Account signature cards

Account applications

Monthly or periodic account statements

Canceled checks (both sides)

Credit and debit memos and advices

Wire transfer authorizations

Deposit slips and deposited items

Cashier’s checks

Money orders

Letters of credit

Safe deposit box rental agreements

All correspondence, including but not limited to letters, memoranda, telegrams, telexes, facsimiles, email and letters of instruction

Memorandum files and/or desk files maintained by the bank or its officers or employees (including specifically employees of any private banking department) reflecting communications between the bank and its client or others acting on the client’s behalf, and documenting actions taken pursuant to directions received from the client or on his/her behalf; and reflecting any thoughts or decisions of the bank or its employees or officers regarding the account

“Know your customer” files or similar records required by local law or practice for anti-money laundering purposes.

The Cardholders’ Identities May Be Shielded by an LLC or Trust

However if the cardholder is an entity, the true owner of the card's identity may not be readily available. For instance, for the years at issue, if the cardholder is a Delaware LLC, the identity of the owners may be very difficult to determine. Some Delaware incorporation services companies promote the high level of privacy afforded by a Delaware LLC in their marketing materials. For instance:

A Delaware LLC filed through a professional Registered Agent affords you the highest level of confidentiality. Only the company name and the name and address of the Registered Agent typically appear on the Certificate of Formation, along with the date of filing and the company file number.

Here is what Delaware LLC privacy offers: No information about the members or managers is required to be listed on the Certificate of Formation, and the Delaware Division of Corporations does not request, obtain or store any information regarding the LLC’s members and managers.

Your Delaware Registered Agent is required, however, to maintain a record of the contact person for the LLC, including the contact person's address. The contact person must be an actual person who is at least 18 years of age.

The contact person does not have to be a member or manager of the LLC and does not need to reside in the United States or be a United States citizen.

Note: Only in recent years (but not in the years for which the Finnish government is seeking assistance) does the United States require that names of the single-owned LLCs be furnished to the U.S. Internal Revenue Service.

South Dakota trust companies likewise promote the privacy provided by South Dakota legislation governing trusts, with marketing such as:

South Dakota’s trust laws emphasize privacy. South Dakota’s Quiet Trust benefits mean the trustor can restrict and even conceal the existence and information about a trust from a trustee. Additionally, sealing trust records from public view is as easy as petitioning the court. These strong privacy laws help protect family assets from spouses, the prying public, and foreign governments looking to collect taxes.

International families looking for a safe harbor to secure their wealth have often sought South Dakota’s trust benefits. These benefits work for the grantor and beneficiaries for generations to come. With global recognition, South Dakota’s laws are crafted to effectively safeguard large amounts of wealth.

If the cardholder whose identity is sought by the John Doe summons is an LLC or trust, the FTA could make a second request under the treaty and ask the IRS to issue a summons to the LLC or the trust, which may in turn reveal the identity of the real person or “warm body” behind the entity and the card. But that effort could lead to legal proceeding objecting to the summons (such as a motion to quash) issued to the LLC or to the trust, which would at least delay the FTA from securing the information and possibly block a response should the court quash the summons.

John Doe Summonses Are Frequently Used to Identify Beneficial Owners

The John Doe summonses issued in this matter are not unusual. They are part of ongoing international efforts by the United States and its treaty partners to stop persons from using foreign financial accounts to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U.S. obligations, and have also approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade foreign tax obligations.

In 2000, the IRS obtained authorization to serve a John Doe summons upon American Express and MasterCard International seeking account records of United States taxpayers who held an interest in American Express or MasterCard payment cards issued by banks in Antigua, Barbuda, the Bahamas or the Cayman Islands. See: In re Tax Liabilities of John Does Who During the Years Ended December 31, 1998 and 1999, Had Signatory Authority Over American Express or MasterCard Credit, Charge or Debit Cards, Case No. 00-cv-3919, 2000 WL 34538137 (S.D. Fla. Oct. 30, 2000);

In 2002, a federal court authorized the issuance of a John Doe summons upon Visa International seeking the identity of United States taxpayers who held certain credit card accounts with ties to foreign banks. See: In re Tax Liabilities of John Does Who During the Years Ended December 31, 1999 through December 31, 2001, Had Signature Authority Over Visa Cards, No. 02-mc-00049 (N.D. Cal. Mar. 27, 2002);

Also in 2002, the IRS received permission to serve a John Doe summons upon MasterCard International seeking the identity of United States taxpayers who held certain credit card accounts with ties to foreign banks. See: In re Tax Liabilities of John Does Who During the Years Ended December 31, 1999 through December 31, 2001, Had Signature Authority Over MasterCard Payment Cards, No. 02-22404, 2002 WL 32879613 (S.D. Fla. Aug. 20, 2002);

In 2011, a federal court authorized service of a John Doe summons upon HSBC India seeking financial account records establishing the identities of United States taxpayers with Indian bank accounts. See: In re HSBC India, No. 11-cv-1686 (N.D. Cal. Apr. 7, 2011).

What Can Finnish Taxpayers at Risk of Disclosure Do?

The Internal Revenue Code (IRC) permits persons to object to the issuance of summons where, for instance, the summons is directed to a financial institution and seeks the records of a particular person. The IRS is required to give that person notice of the proceedings and to advise that person of their rights to intervene. However, in the case of John Doe summonses, no such intervention is contemplated by the IRC, and no notice is provided because the persons under investigation are not known to the IRS.

However, after the summons has been issued, as is the case here, there is authority for intervention to object to the enforcement of the summons by affected persons, and they may do so on an anonymous basis. For instance, in United States v. Coinbase, Inc., Case No. 17-cv-01431 (N.D. Cal. 2017), the IRS had obtained a court order permitting it to serve a John Doe summons to Coinbase, Inc. Coinbase refused to comply with the summons and the government brought an enforcement case in federal district court. Coinbase is an exchange that deals in convertible virtual currency, operating a bitcoin wallet and exchange business. The purpose of the John Doe summons was to permit the IRS to determine whether Coinbase customers were properly reporting gains from the sale or exchange of their virtual currency.

The issue before the court was whether an anonymous Coinbase customer (John Doe 4) could intervene on an anonymous basis in the enforcement action. The court permitted the unnamed customer to intervene in the enforcement proceedings. U.S. v. Coinbase, No 17-cv-01431-JSC D. CO Order Re: Motions to Intervene dated July 18, 2017.

It is highly improbable that the financial institutions involved in the current John Doe Summons will resist providing the requested information. But, the proceedings are now beyond the issuance (of the summons) stage. Now the question is: Would a court permit an unnamed Finnish citizen to intervene in the process at this stage? Time will tell.

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